Warning: Pot stocks may be smoke and mirrors

The regulations regarding medical marijuana came into effect on April 1, 2014.

As a result of the changes enacted by the Federal government, which make it easier for businesses to participate in this burgeoning industry, a significant number of junior mining companies have begun exploring getting involved.

The concern on the part of regulators is that many of these junior mining stocks have seen a positive impact from their announcements without providing enough background information for investors to make educated and informed decisions about the risks involved.

“Our review focused on whether an issuer’s initial press releases, announcing its intent to enter this industry, contained sufficient detail to enable investors to understand what resources have been committed to the plan,” says the CSA report, “as well as the related risks, cost implications and time required before the issuer can begin licensed operations. We are also concerned about whether press releases included unnecessary details such as exaggerated reports or promotional commentary, which could mislead investors as to the stage of development of an issuer’s plans.”

While it’s not uncommon for junior mining companies to switch industries and business models, the choice of medical marijuana seems an unusual one given the licensing process to become a grower is very strict – perhaps unnecessarily so.

Georges Routhier is a medical marijuana consultant and has been since 2008. He believes that Health Canada is making the rules up as they go demonstrating very little consistency about standards with medical marijuana applicants. With a license hanging in the balance applicants aren’t exactly mouthing off.

“Everybody, every single licensed applicant is suffering from what I call ‘whipped dog syndrome,’” says Routhier. “Who wants to bite the hand that’s going to feed them?”

A second issue, perhaps even more pressing, is the constitutional challenge of Canada’s marijuana laws being heard before the Federal Court of Canada. Groups from law enforcement to medical experts and everything in between are currently making presentations to the court. If the medical marijuana laws on the books are thrown out, the ramifications for growers, both current and prospective, are significant.

Uncertainty, advisors understand, is not something clients appreciate. Putting money down on a junior mining company turned medical marijuana producer is anything but a sure thing.